In an early May 2012 post, I instructed the readers of this newsletter to short Facebook. I hope you followed my advice. I did and now John Paulson and I are both gurus. How can Facebook monetize its assets?
What does it own? On some level it is like Central Park in NYC. I'm in Manhattan now so allow me to expand upon this lousy analogy. In Central Park, you walk around with your friends talking and sharing and enjoying life. But, imagine if everything you do in the Park is recorded and photographed. There is a privatization of the commons. The net result is that FB owns data about you and your social networks.
If you have stable preferences and if your preferences are positively correlated with your friends' preferences as revealed by what they share in "the park" then FB should have a valuable asset to sell to micro advertisers. But, where does the ACLU figure in here? Will people be allowed to opt out of having their data shared with for profit firms? If the legal courts rule that there there can be an "opt out", what types of data self selection issues will this create? Rather than having data for a representative sample of Facebook users, in the "opt out" world --- advertisers would have a "funky" sample or non-representative sample of exhibitionists who are willing and eager to share their "likes" with spammers.
The second challenge for FB is the rise of the mobile device. FB must figure out how to create ads that people actually like. For example, suppose I like the Rolling Stones -- they must figure out how to embed a Toyota commercial into "Get off my Cloud" so that I listen to the song and hear the ad. As TIVO showed, another company will figure out how to allow mobile device users to scrub out the ads if they simply take up time and space between content provision.
Perhaps the best chance for FB is to team up with the internal revenue service of different nations to identify tax evasion by identifying individuals whose consumption patterns appear to be much greater than their reported income profile.
Another promising outlet for FB would be for it to foster "conspicuous consumption" and trade stocks based on the sociological waves it creates. FB needs to set off fads and waves for the next hula hoop and then collect a % of the revenue for creating the initial conditions and amplification such that the social multiplier effect plays out. FB then could start to short the stock of companies who product's cycle has "jumped the shark". FB would know this by plotting its own data. FB could also do this in political markets. Think of the excitement about Obama in 2008. FB could use its machinery to help elect future presidents and anticipate who will be the next President and trade on this endogenous information.
So, FB's best chance is to morph into being a hedge fund that uses its micro data to anticipate trends. Perhaps it should merge with Goldman Sachs?
